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Simple and

Compound Interest
Simple Interest
Suppose you won P10,000 and you
plan to invest it for 5 years. A
cooperative group offers 2% simple
interest rate per year. A bank offers
2% compounded annually. Which
will you choose and why?
Solution:
Simple interest, with annual rate r
Time(t) Principal Simple Interest Amount after t years
(P) (Maturity Value
Solution Answer

1 10,000 (10,000) (0.02) (1) 200 10,000 + 200 = 10,200

2 (10,000) (0.02) (2) 400 10,000 + 400 = 10,400

3 (10,000) (0.02) (3) 600 10,000 + 600 = 10,600

4 (10,000) (0.02) (4) 800 10,000 + 800 = 10,800

5 (10,000) (0.02) (5) 1000 10,000 + 1000 = 11,000


Solution:
Compound Interest, with annual rate r
Time Amount Compound Interest Amount at the end of year t
(t) at the (Maturity Value)
start of
year t
Solution Answer
1 10,000 (10,000)(0.02)(1) 200 10,000 + 200 = 10,200
2 10,200 (10,200)(0.02)(1) 204 10,200 + 204 = 10,404
3 10,404 (10,404)(0.02)(1) 208.08 10,404 + 208.08 = 10,612.08
4 10,612.08 (10,612.08)(0.02)(1) 212.24 10,612.08+ 212.24 = 10,824.32

5 10,824.32 (10,824.32)(0.02)(1) 216.49 10,824.32+ 216.49= 11,040.81


Compare the interests gained in two
investments.

Simple Interest (in pesos) 11,000 – 10, 000 = 1,000


Compound Interest (in pesos) 11,040.81 – 10,000 = 1, 040.81

What are your observations in simple and compound


interest?

Simple interest remains constant throughout the


investment term. In compound interest, the interest from
the previous year also earns interest. Thus, the interest
grows every year.
Note that the rate r is expressed in percent. Thus, do not forget
to convert it to decimals when used in the computations. The
time t is normally expressed in years. In cases that time is
expressed in months or days, do not forget to convert it to its
equivalent number of years using the following conversion
formulas:

t = n months means that


𝑛
t= years
12

t = m days means that


𝑚 𝑚
t= years or t = depending on the requirement in the
360 365
problem
Simple Interest
To compute for the simple interest, we apply the formula:

I = Prt

There are also instances when P, r or t might be unknown. We


use the following formulas to compute for P, r, and t
respectively.
𝐼
P=
𝑟𝑡

𝐼
r=
𝑃𝑡

𝐼
t=
𝑃𝑟
Example 1:
Issa deposited Php 10,000 in a bank that offers a
simple interest rate of 2.5%. If she placed the money
for 3 years, how much interest will she earn at the end
of 3 years?
Given:
P = Php 10,000
r = 2.5%
t = 3 years

Solution:
I = Prt
= (10,000) (0.025) (3)
= Php 750

Thus, Issa will earn Php 1,750 worth of interest after 3 years.
Example 2:
JB borrowed Php100 000 from Yani to have his car
repaired. If Yani charges a simple interest of 3%
per annum and JB plans to pay his loan in 6
months, how much interest should JB pay?
Given:
P = Php 100 000
r = 3%
6
t = 6 months or years or 0.5 years
12

Solution:
I = Prt
= (100 000) (0.03) (0.5)
= Php 1500

Thus, JB should pay Php 1500 to Yani for interest alone.


Example 3:
How much interest will be earned when Php 520 000 is
invested at the rate of 5.75% per year for 90 days. Assume
that there are 360 days in a year.
Given:
P = Php 520 000
r = 5.75%
90
t = 90 days or year or 0.25 year
360

Solution:
I = Prt
= (520 000) (0.0575) (0.25)
= Php 7 475

Thus, Php 520 000 should be repaid including interest that amounts to
Php 7 475.
Compound Interest
To compute for compound interest, we apply the formula,

𝑟
A = P (1 + )nt
𝑛

A = amount of money accumulated after n years, including


interest
P = principal
r = rate
n = number of times the interest is compounded per year
t = number of years the amount is deposited or borrowed for
Example 1:
An amount of Php 1500 is deposited in a bank paying an
annual interest rate of 4.3%, compounded quarterly. What
is the balance after 6 years?

Given:
P = Php 1500
r = 4.3%
t = 6 years
n=4
Solution:
0.043 (4)(6)
A = 1500 (1 + )
4
= Php 1 938.84

The balance after 6 years is approximately Php 1 938.84


Assignment
1. Andy borrowed Php 50 000 from Banco Matatag to pay for
her daughter’s tuition. If the bank charges 4.25% interest rate,
how much interest should Andy pay after 3 years?

2. Ronald invested Php 1 000 000 using an investment


instrument that promises to pay a simple interest rate of 1.75%
per annum. If Ronald withdraws the money after 9 months, how
much interest will he earn by then?

3. If you have a bank account whose principal is Php 1000 and


your bank compounds the interest twice a year at an interest
rate of 5%, how much money do you have in your account at the
end of the year?
There are certain situations when the unknown could be the P, r
and t. Let’s have the following examples:

Example1: Andrew borrowed money from Magnificent Lending


Services at 2.75% simple interest for 120 days to add to his
funds for house repair. If he was charged Php 3 300 for interest,
how much did Andrew borrow? (Assume that there are 360
days)
Given:
r = 2.75%
120
t = 120 days or years or 0.3333 years
360
I = Php 3 300
Solution:
𝐼
P=
𝑟𝑡
3300
=
(0.0275)(0.3333) Therefore, Andrew borrowed Php 360 000
= Php 360 000
Example 2:
At what rate did Simon invest his money amounting to Php
175 000 if he received Php 2843.75 worth of interest after
6 months?
Given:
P = Php 175 000
I = Php 2843.75
T = 6 months or 0.5 years
Solution:
𝐼
r=
𝑃𝑡
2843.75
=
(175000)(0.5)
= 0.0325 or 3.25%

Thus, Simon invested his money at the rate of 3.25% per year.
Example 3:
How long will it take for an investment of Php 250 000 to
double itself if it is invested at the rate of 8%?
Given:
P = Php250 000
r = 8%
I = Php 250 000
Solution:
𝐼
t=
𝑃𝑟
250000
=
(250000)(0.08)
= 12.5 years or 12 years and 6 months

Therefore, it will require 12 years and 6 months to double the


investment at the given rate of interest
Group Activity:
Complete the entries in the given table: Assume 360 days

Principal (P) Rate (r) Time (t) Interest (I)


1 Php 120 000 1% 5 years (1)
2 Php 50 000 2.8% (2) Php 1 250
3 Php 10 000 (3) 3 months Php 525
4 (4) 3.5% 120 days Php 4 130.75
5 Php 500 000 2.5% 8 months (5)
6 Php 25 000 6.25% (6) Php 1 200
7 Php 1 200 000 (7) 1.5 years Php 20 000
8 (8) 4.20% 90 days Php 18 065.25
9 Php 25 000 (9) 45 days Php 375
10 (10) 2.05% 8 months Php 5 250
Maturity (Future Value) of
Simple Interest
F = P + Is

Where
F = maturity or future value
P = Principal
Is = simple interest

F = P (1 + rt)
Where
F = maturity or future value
P = Principal
r = rate
t = term/ time in years
Example 1:
Find the maturity value if 1 million pesos is deposited in a
bank at an annual simple interest rate of 0.25% after
(a) 1 year and (b) 5 years.
Given:
P = Php 1 000 000
r = 0.25%
(a) After 1 year

Method 1: Method 2:
Is = Prt
= (1000000)(0.0025) (1) F = P (1 + rt)
= 2 500 = (1000000) [1 + (0.0025) (1)]
= 1 002 500
F = P + Is
= 1 000 000 + 2 500 The future or maturity value after 1
= 1 002 500 year is Php 1 002 500
(a) After 5 years
Given:
P = Php 1 000 000
r = 0.25%

Method1: Method2:
Is = Prt F = P (1 + rt)
= (1000000)(0.0025) (5) = (1000000) [1 + (0.0025) (5)]
= 12 500 = 1 012 500
F = P + Is
= 1 000 000 + 12 500 The future or maturity value
= 1 012 500 after 5 years is Php 1 012 500
Maturity (Future Value) of
Compound Interest
F = P (1 + r)t

Where
P = Principal or present value
F = maturity or future value
r = interest rate
t = term/ time in years

The compound Interest Ic is given by


Ic = F - P
Example1:
Find the maturity value and the compound interest if P10 000
is compounded annually at an interest rate of 2% in 5 years.

Given: Solution:
P = P10 000 F = P (1 + r)t
r = 2% = 10000 (1 + 0.02) 5
t = 5 years = 11, 040.081
Ic = F - P
= Php 11 040.081 – Php 10 000
= 1, 040.081

The future value is Php 11 040.081 and the


compound interest is Php 1 040.081.
Present Value
Simple Interest
P = Future Value
(1 + rt)

Compound Interest
P = Future Value
𝑟
(1 + )nt
𝑛
Example1:
What is the present value of Php 50,000 due in 7 years if money
is worth 10% compounded annually?

Given:
Solution:
F = 50,000
P = 50 000
t = 7 years
(1 + 0.10)7
r = 10%
= 25, 657.91
P=?
Group Activity:
1. Complete the table by finding the unknown.
Principal (P) Rate (r) Time (t) Interest (I) Maturity Value
(F)
60 000 4% 15 (1) (2)

(3) 12% 5 15000 (4)

50 000 (5) 2 (6) 59 500

(7) 10.5% (8) 157 500 457 500

1 000 000 0.25% 6.5 (9) (10)

2. Find the maturity value and interest if P50 000 is invested at


5% compounded annually for 8 years?
Formulas:
Simple Interest Compound Interest
𝑟
I = Prt A = P (1 + )nt
𝑛
Ic = F - P

Future Value / Maturity Value Future Value / Maturity Value


F = P + Is F = P (1 + r)t
F = P (1 + rt)

Present Value Present Value


P = F__ P = F___
(1 + rt) 𝑟
(1 + )nt
𝑛
Quiz:
1. You want to start saving money. You placed a time deposit in
Bank A for Php 50 000 with an interest rate of 5%. How much
will your saving be after 5 years if:
a) Invested following simple interest rate?
b) If compounded twice a year.

2. You are planning to invest in a high-risk mutual fund of Bank A


which will give you 5% interest in 5 years. Your target is to earn a
total amount of Php 1,000,000. How much should you invest if
the investment is:
a) Under simple interest scheme?
b) Compounded monthly?
Quiz
3. Find the maturity value and interest if
Php 50,000 is invested
a. at an annual simple interest rate of 5% after
8 years
b. at 5% compounded annually for 8 years
Question to Ponder:
Where people pay by
installment?
Insurance Companies
Car Loans
Home Appliances Installments
House and Lot Installment
Payments by
installment are done
periodically, and in
equal amounts. These
scheme is called
annuity.
Annuity
A sequence of payment made at equal
(fixed) intervals or periods of time.
Payment interval = the time between
successive payments

Annuities may be classified in different


ways, as follows:
According to payment interval
and interest period
Simple Annuity = an annuity where the
payment interval is the same as the
interest period

General Annuity = an annuity where


the payment interval is not the same
as the interest period
According to Time of Payment
Ordinary Annuity ( or annuity
immediate) = a type of annuity in
which the payments are made at the
end of each payment interval

Annuity Due = a type of annuity in


which the payments are made at
beginning of each payment interval
According to Duration
Annuity Certain = an annuity in which
payments begin and end at definite times.
Ex. installment basis of paying a car,
appliances, house and lot, tuition fees, etc.

Contingent Annuity = an annuity in which


the payment extend over an indefinite (or
indeterminate) length of time. Ex. Life
insurance, pension payments
Term of Annuity, t = time between the first
payment interval and the last payment interval

Regular or Periodic Payment, R = the amount


of each payment

Amount (Future Value) of an annuity, F = sum


of future values of all the payments to be made
during the entire term of the annuity

Present value of an annuity, P = sum of


present values of all the payments to be made
during the entire term of the annuity
Time Diagram
An installment payment of an appliance of P3000 every month
for 6 months
Future Value of Simple
Annuities

To find j:
j = _i_
m
where i = interest
m = number of conversion per year
Example1:
In order to save for her high school graduation, Marie decided to
save P200 at the end of each month. If the bank pays 0.25%
compounded monthly, how much will her money be at the end
of 6 years?
Given:
R = P200
m = 12
i(12) = 0.25% = 0.0025
0.0025
j= = 0.0002083
12
t = 6 years
n = tm = 6(12) = 72 periods
Find F:
Example2:
Suppose Mrs. Remoto would like to save P3,000 at the end of
each month, for six months, in a fund that gives 9% compounded
monthly. How much is the amount of future value of her savings
after 6 months?

Given:
R = P3,000
t = 6 months
i(12) = 9% = 0.09
m = 12
0.09
j= =0.0075
12
n = 6 periods
Find F:
Future Value of General
Annuities
The formula for the future value of general annuity is the same
as that for a simple annuity. The extra step occurs in finding j;
the given interest rate per period must be converted to an
equivalent rate per payment interval.
Example1:
Mel started to deposit P1000 monthly in a fund that pays 6%
compounded quarterly. How much will be in the fund after 15
years?

Given:
R = Php 1000
n = 12 (15) = 180 payments
i4 = 6% = 0.06
m=4
Find F:
Since the payments are monthly, the interest rate of 6%
compounded quarterly must be converted to its equivalent
interest rate that is compounded monthly.
Thus, the interest rate per monthly payment interval is 0.004975
or 0.4975%

Apply the formula in finding the future value of an ordinary


annuity using the computed equivalent rate
Example2:
A teacher saves P5000 every 6 months in a bank that pays 0.25%
compounded monthly. How much will be her savings after 10
years?

Given:
R = P5000
n = 2(10) = 20
i12 = 0.25% = 0.0025
m = 12

Find F:
Convert 0.25% compounded monthly to its equivalent interest
rate for each semi –annual payment interval.
Present Value of Simple
Annuities
The present value of a simple annuity is given by:
Example1:
Suppose Mrs. Remoto would like to know the present value of
her monthly deposit of P3000 when interest is 9% compounded
monthly. How much is the present value of her savings at the
end of 6 months?

Given:
R = P3000
i = 9% = 0.09
j = 0.09/12 = 0.0075
n = 6 months
m = 12
Find P:
Example2:
Find the present value if quarterly payments of P2000 for 5
years with interest rate of 8% compounded quarterly.

Given: P = 2000 * 1- (1+0.02)-20


R = P2000 0.02
i = 8% = 0.08 P = 32, 702.87
j = 0.08/4 = 0.02
t = 5 years
n = 5(4) = 20 payments
m=4
Present Value of General
Annuities
The formula for the future value of general annuity is the same
as that for a simple annuity. The extra step occurs in finding j;
the given interest rate per period must be converted to an
equivalent rate per payment interval.
Example1:
Ken borrowed an amount of money from Kat. He agrees to pay
the principal plus interest by paying P38, 973.76 each year for 3
years. How much money did he borrow if interest is 8%
compounded quarterly?

Given:
R = P38,973.76
i4 = 8% = 0.08
m=4
n = 3 payments
Find: P
Thus, Ken borrowed P100,000 from Kat.
Example2:
Mrs. Reyes would like to buy a television set payable monthly for
6 months starting at the end of the month. How much is the
cost of the TV set if her monthly payment is P3000 and interest
is 9% compounded semi-annually?

Given:
R = 3000
i(2) = 9% = 0.09
n = 6 payments
m=2
Find P:
Quiz
1. Peter started to deposit P5,000 quarterly in a fund that pays
1% compounded quarterly. How much will be in the fund after 6
years?

2. Find the present value of an ordinary annuity of P5000


payable semi-annually for 10 years if money is worth 6%
compounded semi-annually.

3. Find the future and present value of semi-annual payments of


P500 at the end of each term for 10 years with interest rate of
5% compounded semi-annually.